One thing that amazes me is that so many people still go to financial advisors who take cookie-cutter approaches. I’m talking about advisors who recommend their clients a bunch of products or investments that are not customized to their clients’ needs. These advisors don’t do research or bother to find the right products or investments. Even worse, they have no idea what rate of return their clients need so that their money will last them for the rest of their lives. Wouldn’t this be the first thing to consider BEFORE selecting investments? You must know the rate of return. It’s all about ensuring your money is there for you when you need it, which means it should factor in inflation, various savings or retirement accounts you may have, and changes to your Social Security benefits. Many advisors don’t take the time to figure this number out, which puts their clients’ money in danger. Of course, even if you know what rate of return you need, you need to consider a few other things as well. If you need a 3% rate of return every year to ensure you never run out of money, does it make sense to have 100% of your money in the stock market? If you’re nearing retirement and fully invested in the stock market, will double-digit returns significantly improve your retirement lifestyle? And keep in mind reward becomes risk because you’re also liable to see double-digit losses. If you look at the crash in 2000, we went through three years of losses, which decimated a lot of people’s portfolios. In 2008, the drop from the top of the market to the bottom was practically a loss of 50%. Again, this loss significantly reduced the portfolios of many people who were heavily invested in the stock market. If you were also taking income from this portfolio, you probably still haven’t recovered, and others will likely never recover. The Rate of Return You Must Have in Retirement Know Your Rate of Return
When you hire an advisor, it’s important to know there are advisors who are only licensed to invest your money into the stock market — and that’s it. Additionally, other advisors are only licensed to sell you insurance- based products. When you decide to work with an advisor, it’s important to understand how they’re licensed and what they can do with your money. At Bridgeriver, for example, we’re licensed in both. But more importantly, we’re not interested in putting your money into one or the other and walking away. I want to know what rate of return you need before we do anything else. When we know your rate of return, we can then invest accordingly, giving you confidence in the future of your money. Now, I’m not saying anything is necessarily wrong with investing fully in the stock market; you just need to be aware of the risk you’re taking on. If you’re a younger investor and the big drops aren’t a major concern, it might make sense to invest more heavily in the stock market. However, if you’re close to retirement or retired, investing heavily in the stock market — and taking on the possibility of double-digit losses — will put you in a bad position. It has the potential to destroy your portfolio, and then you face the prospect of completely restructuring your retirement. You’ll have to plan again and figure out how you’re going to stretch out your remaining money.
Again, it all comes back to your rate of return, which can help determine how your portfolio should be diversified. Always work with an advisor who is willing to determine your rate of return and which investments are right for you.
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